15 Oct Canberra finally ends $2b in adviser perks
Aleks Vickovich – The Australian Financial Review – Tuesday 15 October
Financial advisers are mulling a legal challenge after the Federal Parliament passed legislation to end $2 billion in commissions as recommended by the Hayne royal commission.
The laws will end ongoing revenue from commissions paid to financial advisers from fund managers and other financial product manufacturers by January 1, 2021.
Investment product commissions were banned under the Labor government in 2012 but, after intense industry lobbying, the law did not apply retrospectively, allowing advisers to continue to reap the benefits of legacy conflicted remuneration.
“Grandfathered conflicted remuneration can compromise the quality of advice as financial advisers may be unwilling to switch consumers into newer, better products if it means the adviser will lose their entitlement to grandfathered conflicted remuneration,” said Superannuation Minister Jane Hume on Tuesday.
“Consumers will benefit from lower fees following the removal of conflicted remuneration for financial advice.”
Recommendation 2.4 of the banking royal commission’s final report decreed that “grandfathering provisions for conflicted remuneration should be repealed as soon as is reasonably practicable”.
“Today’s announcement is a great win for Australians,” said Choice policy and campaigns adviser for financial services, Patrick Veyret.
“Over six years have passed since the (Future of Financial Advice) reforms and yet financial advisers continue to receive between $1.5 billion and $2 billion every year in grandfathered commissions.”
Choice believes the passage of the bill is the first “substantive law reform” relating to a royal commission recommendation.
Liberal senator James Paterson said during the debate that the passage of the bill was an example of “positive” action by the government in response to the royal commission, but also raised a number of concerns about the pace of reform.
“By the end of 2020, all recommendations that the government has promised to take action on will be introduced to Parliament,” he said. “That is a very, very swift pace of change. We do no-one any favours if it is rushed and not done wisely.”
He also warned that while in the case of conflicted revenue for financial advisers grandfathering had resulted in a “perverse set of outcomes”, but that in general the parliament should not abandon a commitment to proactive legislation.
“Grandfathering is a good thing that we should largely adhere to,” he said. “It is a fair thing to do for people who have lawfully entered into arrangements consistent with the policies of the day.”
The passage of the grandfathered revenue ban through the Parliament has not deterred the lobbying efforts of some sections of the financial advisory industry who oppose the changes.
Lifespan Financial Planning chairman John Ardino, who licenses 180 Australian financial advisers, said the removal of grandfathered revenue could have unintended negative consequences for clients, including loss of Centrelink and capital gains tax benefits.
“The result of all this for consumers is that it will raise the costs of advice, reduce access to advice and leave thousands of clients orphaned without any access to advice,” he said.
The Association of Independently Owned Financial Professionals intends to continue pursuing legal action for what it perceives as an unlawful expropriation of property rights by the federal government.
“The AIOFP, its members and the advice community in general are determined to challenge this legislation in the High Court,” said executive director Peter Johnston.
Mr Johnston’s association is comprised of 150 licensees representing 6000 financial advisers. He estimates that 50 per cent of his membership is “significantly reliant” on grandfathered revenue; 25 per cent are “partially reliant”; and the remainder are largely unaffected by the law.
He says that neither the royal commission nor Federal Parliament have conducted sufficient due diligence on the market impact of the reform, echoing criticisms that Liberal backbenchers including Bert Van Manen have made against the Australian Securities and Investments Commission during parliamentary joint committee hearings.
ASIC has declined multiple requests for comment on the topic of grandfathered commissions to financial advisers.